Few growth stocks have escaped the recent market downturn. And with the Federal Reserve increasing interest rates, growth-oriented companies may face a difficult road ahead. Higher rates make it costlier to borrow money, contributing to lower potential future earnings for corporations and affecting the performance of equities, especially those considered less safe.
Thankfully, that's not a death sentence for all growth stocks. Those that have been leaders in their respective fields for a while, possess a strong moat, and still have solid opportunities to exploit will be just fine. Here are two companies that fit this description: Microsoft (MSFT -1.10%) and Visa (V 0.72%). These stocks are worth holding forever.
Microsoft squarely features on the list of companies whose services people use every day. It remains the leader in the market for computer operating systems (OS) by a wide margin, with a roughly 76% share of the desktop OS space as of June. Of course, Microsoft's business is much larger than that. The company is also present in gaming, and it offers various cloud-based services.
While it doesn't enjoy the kind of dominance in these two other segments that it does in computer OS, it is one of the leaders within these markets. Still, Microsoft's robust business hasn't allowed it to escape the recent sell-off.
On the one hand, revenue growth slowed compared to last year. In its latest quarter, the fourth of its fiscal year 2022, ending on June 30, the company's revenue increased by 12% year over year to $51.9 billion. But Microsoft's current top-line growth rates aren't that abnormal by the standards it has set over the past decade.
The company's quarterly earnings per share (EPS) increased by 3% year over year to $2.23. Further, the tech giant remains a cash-generating machine -- with a current free cash flow of $65.2 billion. Overall, Microsoft's financial results haven't been that bad, despite what its stock market performance this year would suggest.
The company is poised to bounce back thanks to its strong competitive edge and, of course, its booming cloud business. Microsoft is one of the most recognizable and valuable brands on the planet. Customers gravitate toward companies they know and trust, and Microsoft fits the bill.
That grants the company a solid advantage as it will allow it to continue attracting customers thanks to its brand name. That's before we mention Microsoft's high switching costs. Businesses depend on the company's various productivity tools and cloud-based services that enable them to run their day-to-day operations as smoothly as possible, making Microsoft's services an essential part of their success.
The company's cloud unit, Microsoft Azure, is the second largest around. In its latest quarter, Azure's revenue grew by a much more impressive 40% year over year. The cloud industry is on a long and rapid growth path. With the cash it generates, Microsoft can continue investing in this business unit in which it will almost certainly remain a leader.
That, combined with its other units and moat, makes Microsoft a solid tech stock to buy and forget.
Visa makes money everytime anyone uses a card that bears its logo, which is many times a day. The company helps facilitate credit card transactions, a business model that has worked wonders. Visa is so successful that the number of meaningful direct competitors it has can be counted on one hand.
Since Visa's business largely depends on people spending money, the company is sensitive to macroeconomic (and other) headwinds that may cause a decrease in consumer activity. Perhaps that's why Visa stock is down this year, although the company has outperformed the broader market.
Of note, Visa is performing well despite the economy it faces. During the third quarter of its fiscal year 2022, ending June 30, the company's revenue jumped by 19% year over year to $7.3 billion. EPS jumped by 36% year over year to $1.60. Visa currently has $16.1 billion in free cash flow.
While it sometimes seems as though cash and checks have disappeared and credit and debit cards have entirely taken over, that isn't quite the case yet. According to management, Visa is targeting an $18 trillion opportunity to replace cash and check transactions, which, assuming global cash consumption expands at a compound annual growth rate of 1% annually, wouldn't happen for decades.
As far as its competitive advantage is concerned, Visa benefits from the network effect -- the value of its service grows as more people use it. The more businesses are plugged into its network, the more it is attractive to consumers, and vice-versa. Visa could be subject to legal problems, as some lawmakers have proposed legislation that could disrupt the duopoly it shares with Mastercard.
That is something investors should keep in mind, but even with this caveat, Visa looks like a solid long-term winner.